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Corporate Close-Up: Seven States Lower 2017 Corporate Tax Rates

Happy new year! Seven states have gotten a start on this year by lowering
their corporate tax rates in 2017. These states are Arizona, Indiana, New
Mexico, New York, the District of Columbia, North Carolina and New Hampshire. However,
other states are moving in a different direction. Voters in Louisiana rejected
a referendum to lower the state’s corporate tax rate. In Illinois, legislation
is pending to raise the state’s corporate tax rate by 25 percent. States are changing their rates through a variety of mechanisms, and will likely continue to do so in future as their needs and priorities change.

For several states, these rate changes have been
implemented through statutes that are designed to phase in lower tax rates. These
states include Arizona, which changed its corporate income tax rate from 5.5
percent to 4.9 percent for taxable years beginning from and after Dec. 31,
2016. Similarly, Indiana has scheduled drops in the corporate income tax rate
from the current corporate rate of 6.25 percent, which remains in place until July
1, 2017. After June 30, 2017 and before July 1, 2018, the Indiana rate drops to
6 percent. Indiana has scheduled its rates to drop incrementally until June 30,
2021 when the rate will reach 4.9 percent.

New Mexico has also implemented new tax brackets for
the corporate income tax. The brackets for 2016 were:

4.8 percent of net income up to $500,000;

6.4 percent of the next $500,000 of income; and

6.6 percent of taxable income over $1 million.

The new rates for 2017 in New Mexico are:

4.8 percent of net income up to $500,000; and

6.2 percent of taxable income over $500,000.

While the rate for the New York corporate income tax on the business
income base will not change for 2017, the rate for the business capital base is
dropping from 0.125 percent of business capital to 0.100 percent of the
business capital base. The rate for the business capital base will continue to
drop incrementally until it reaches zero for tax years beginning on or after
Jan. 1, 2021.

Some states have taken a different approach in dropping their rates, and
have required that the state hit specific revenue targets before the rates
drop. The District of Columbia dropped its rate for 2016 to 9.2 percent from
9.4 percent, and because the district hit its revenue targets enumerated in D.C.
Code Ann. § 47-181, the rate will drop again to 9.0 percent for tax years
beginning in 2017.

North Carolina has implemented a similar system for dropping their
rates. Because the tax revenue from collections in the General Fund for the
state exceeded the targeted amount of $20.975
billion, the corporate income tax rate is dropping from 4 percent to 3
percent for taxable years beginning on or after Jan. 1, 2017.

New Hampshire is dropping the state’s business profits tax rate for tax
periods ending on or after Dec. 31, 2016 from 8.5 percent to 8.2 percent.
However, the state has implemented a revenue target for the next scheduled drop
in the rate. Under N.H. Rev. Stat. Ann. § 77-A:2, if New Hampshire has collected
at least $4.64 billion for the biennium ending June 30, 2017, the business
profits rate will drop again to 7.9 percent for taxable periods ending on or
after Dec. 31, 2018.

However, some other states intending to change their corporate
tax rates have run into roadblocks. Louisiana had passed legislation to change
the corporate tax rate from a bracketed system to a flat rate of 6.5 percent
for tax years starting in 2017. However, as Nushin Huq originally noted in the Daily Tax Report,
the change in the rate required a modification of the state’s constitution that
was subject to a vote by Louisiana voters. The voters rejected the amendment,
and Louisiana’s corporate tax rates will stay the same for 2017.

Some Illinois lawmakers, on the other hand, had planned to raise the
state’s corporate tax rate in new legislation. However, a “grand bargain” that
would have raised the corporate tax rate to help alleviate the state’s fiscal
crisis stalled in the final days of the previous General Assembly without a
vote, as reported by the Daily Tax Report’s
Michael Bologna. The tax provisions have been reintroduced since the new
General assembly has been sworn in and would raise the corporate tax rate to 7
percent from 5.25 percent. The outcome of the proposed legislation remains to
be seen, as raising the corporate tax rate is a contentious issue.

As taxpayers move forward, rates will continue to change as states have
changing methods for balancing the need to maintain fiscal stability in state
budgets with attempts to attract businesses through lower tax rates.

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